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On the frontiers of energy: The future of unconventional natural gas

World Shale Gas Conference Houston, Texas

Mark W. Albers

On the frontiers of energy: The future of unconventional natural gas

Thank you and Good Morning! It is an honor to join you and my fellow colleagues as we commence this World Shale Gas Conference.

Today, we are asked to explore the question: “What’s Next for Shale Gas Development?”

That is a pretty interesting question considering how such a topic would have seemed inconceivable at a major energy conference just a few years ago.

It was not that long ago that the potential of shale gas development was almost completely unrecognized. In this country, it wasn’t just the public that had never heard the term shale gas. Many in government and our industry never imagined how the North American natural gas market would be transformed. In fact, as long ago as 2003, the experts were predicting natural gas production was on the decline.

Yet, in 2011, our industry is projected to produce more natural gas in the United States than at any time in history.

That is profoundly good news, because access to reliable, affordable energy is a fundamental building block of modern life — it’s vital to improving people’s health, alleviating poverty, and boosting living standards.

In 1865 the English economist William Jevons noted that with energy “almost any feat is possible. … [but] without it we are thrown back into the laborious poverty of early times.” The economic history of the last century and a half has confirmed the insight of that observation, year in year out, without exception.

Human ingenuity has led to a dramatic evolution of advanced technologies and modern energy supplies that enable economic development. Similarly, history shows that energy demand not only increases in conjunction with economic growth, but that the types of energy that we rely on also evolve with time.

What does that mean for the next two decades, with world population forecasted to grow from 7 billion people to 8 billion?

It means we can expect to see global energy demand increase by 25 percent today over 2010 levels by 2030. Essentially all of this growth in demand will come from non-OECD nations, led by China, which is becoming increasingly predominant in the energy mix.

To meet this growing demand, we are going to need to develop all commercially viable energy sources, including natural gas. We expect natural gas to be the fastest-growing major fuel over the next two decades, with global demand increasing by 50 percent over today. In fact, we project that demand for natural gas will surpass demand for coal over this period, making it second only to oil as the world’s leading energy source overall.

So why do we and others view natural gas as a leading fuel of the future? Key to the growth in natural gas is its use in power generation in what we all know is a world where demand for electricity is steadily increasing.

By 2030, global electricity demand is likely to be 80 percent higher than 2005 levels, driven by expanding prosperity in the developing world.

Again, that is good news. It means untold millions of people will escape poverty, aided by the rise in supply of natural gas. Today, a billion people still live without access to electricity. That is changing, partly because of the availability of natural gas. The great story of the next few decades is how electricity from gas and other fuels will extend the benefits of modernity to more and more people, improving and saving lives in the process.

There are other benefits as well. The rise in supply of natural gas offers a reliable, flexible, affordable, and efficient fuel that adds to diversity of energy supplies. And natural gas offers environmental benefits, producing up to 60 percent fewer greenhouse gas emissions than coal in electricity generation.

Natural gas requires a smaller fraction of the water required to produce other forms of energy such as coal and nuclear.

Simply put, it has become increasingly clear that natural gas can play an integral role in addressing a host of economic, environmental, and energy security challenges.

This means that the growth in unconventional natural gas production comes at a time when the international energy market needs it most — and from a source few people seriously considered a decade ago.

What is surprising about the new innovations that have allowed us to reach shale gas is that they’re actually not very new. Our industry started directional drilling in the 1920s, leading to substantial use of horizontal drilling in recent decades. And we have used hydraulic fracturing since the 1940s.

It’s the combination of these two proven practices to unlock vast stores of previously inaccessible natural gas is therefore not so much a revolution, in my view, it is an evolution. It is the culmination of decades of experience, innovation, and integration of proven technologies. Though the shale gas boom sometimes seems like an overnight development, in truth it has been decades in the making.

What has taken place practically overnight is the transformation of our nation’s outlook for natural gas. Not long ago many worried about a natural gas supply shortage. However, as President Obama recently stated, a “century’s worth …lies in the shale beneath our feet.”

A decade ago gas from shale accounted for 2 percent of U.S. natural gas production. Today it is nearly 30 percent and growing.

This has provided tremendous benefits to the United States — creating jobs during challenging economic times.

The unconventional gas boom has helped reinvigorate the domestic petrochemical industry, which relies on gas as a feedstock to make plastics and the other building blocks of modern manufacturing. It is strengthening America’s steel industry, which is reopening mills and hiring workers to support shale gas drilling. And areas where shale gas drilling is occurring are experiencing economic growth, job creation, and increased tax revenue. For example:

Unconventional oil and gas production in North Dakota’s Bakken Shale has made the state an economic powerhouse, with close to $5 billion in direct economic activity in 2009.

A study of the Barnett Shale formation near Fort Worth estimates it is now responsible for $11 billion in annual economic output and more than 100,000 jobs for the North Texas region.

And the most recent Pennsylvania state labor statistics show 214,000 Marcellus Shale-related jobs at the beginning of 2011 — of course that number is growing Penn State researchers meanwhile calculate that Marcellus drilling could add nearly $10 billion in value to the Pennsylvania economy this year.

To ensure such benefits continue, our industry must exercise a firm commitment to continue properly managing the risks involved with energy production. That means meeting the highest standards of well design and integrity. It means safely and efficiently handling the water and additives used to fracture wells. In addition to these operational challenges, we must continue to educate the public about the hydraulic fracturing process and the benefits of natural gas.

Energy Secretary Steven Chu recently declared: “We believe it’s possible … to extract shale gas in a way that protects the water, that protects people’s health. … We can do this safely.”

Those of us in this room know we can do this safely. We know how to protect groundwater. We know the process is well regulated. We know it is possible to extract these resources while safeguarding the surrounding environment. And we have been applying these technologies for decades. But to many communities, unconventional oil and gas production seems novel or untested.

So it is really incumbent on us to work with community leaders and the public to educate them and address their concerns. A sound public understanding of how those unconventional resources are recovered is part of the industry’s license to operate.

In his new book, The Quest, Dan Yergin makes a simple but profound observation: “There’s no geologic law that restricts shale gas to North America.”

The question so many want answered — indeed it is what our panel has been asked to weigh in on — is whether what has happened here in North America will translate internationally.

At ExxonMobil we believe it can. There is potential for substantial stores of unconventional resources in Europe, Latin America, and Asia. When we announced our merger with XTO Energy almost two years ago, one of the factors in our thinking was the opportunity to combine XTO’s expertise in unconventional production with ExxonMobil’s global reach.

Our two companies came together in June last year, and we are quickly evaluating the possibilities of several international unconventional opportunities overseas.

I would caution that this process will go slower than it did in North America, which started with advantages many potential international plays do not possess. The industry began here with a much better understanding of the geologic shale gas potential than we currently have elsewhere in the world. Acquiring that knowledge will take time.

Other advantages included a well-developed pipeline infrastructure, a drilling and fracture stimulation service industry, and familiarity with operations involving large numbers of wells, trucks, and traffic. In addition to these technical skills, North America offered competitive markets, strong systems of property and mineral rights, and a generally supportive policy framework.

The potential is there. Analysis from Cambridge Energy Research Associates suggests recoverable shale gas in the rest of the world could be between four and 14 times as much as in North America. Numbers like those are too big for industry — and energy consumers — to ignore.

But it’s not merely the geology of the rock below the surface that will determine where global shale gas development goes next. It also depends on the environment above ground, namely the economic and political climate in a given region. Development will favor nations with sound energy policies.

Our experience in the U.S. has shown that government has a critical role to play to enable the development of unconventional resources.

The governments that understand how market-based policies foster growth and investment will be in the best position to take advantage of the economic opportunities presented by unconventional gas.

Such policies allow and encourage long-term economic planning … they uphold the rule of law and recognize the sanctity of contracts … they provide a fair, stable framework of law, taxation, and regulation … they promote free trade and encourage international partnerships … they encourage transparency and openness … and they establish a level playing field for all competitors.

When these policies are in place, our industry has proven time and time again that we can unlock new supplies of affordable, reliable energy in a safe, secure, and environmentally responsible manner.

So it will be with the development of shale gas and other unconventional resources as they expand beyond the borders of North America.

With a commitment to sound energy policies, governments and industry leaders can ensure the world’s vast stores of these resources will help create jobs … fuel economic growth … and build a brighter future than even the most optimistic among us dared envision just a handful of years ago.